Financial Planner 43551

The Wealth Mirage

In Income Planning, Investment Management, Weekly Articles by Adam Cufr

“We’ll retire when the 401(k) hits a million.” Or $500,000, or $5,000,000. It’s not uncommon at all for people to set financial goals like these that are very clear and very exciting. After all, what’s unclear about getting to a certain dollar amount in savings? And while I applaud these goals and will cheer for you as you work toward them, there’s a funny mindset shift that ought to take place, however, to put this money into the proper retirement context. Bear in mind though, it’s not easy to do.

When retirement nears, my favorite question to ask an aspiring retiree is this: “How much money do you need each month in order to continue your current lifestyle?” It’s a simple enough question but it’s also one that asks a lot of the person tasked with responding. The reason it’s so tough is because I’m really asking you what that $500,000 or $5,000,000 needs to do for you in retirement, and this leads to the ‘wealth mirage’.

The big transition retirees need to make is that of growth-to-income. In other words, it’s not necessarily how much money you have, but rather how much income does that money need to generate in order to accomplish your objectives. Here’s a quick example, A person with a million dollars who needs just $2,500 per month to live on is really a VERY wealthy person, while a person with a million dollars who needs $25,000 per month to live on had better think about a Plan B when the money runs out. The same amount of ‘wealth’ means very different things to these folks because of their real or perceived needs for that wealth.

Another way of looking at the wealth mirage is this: just because a person has $500,000 or $5,000,000 dollars doesn’t mean they really have access to all of that wealth if their plan is to retire and live off of that money. The moment a retiree who’s living off that money decides to withdraw, say an extra $100,000, from that wealth, the income utility of that nest egg is reduced. That can create a feeling of money being trapped. “Boy, a million dollars isn’t what it used to be” is a common sentiment because needing all of that money to generate sufficient income to live on means you really don’t feel like you have that money at all. What a bummer. That’s the wealth mirage.

While there’s no escaping this reality of money, per se, there are ways to position the money to provide both economic and psychological benefits for a retiree. One prime example is to invest that money not in pure growth investments, but in income-producing investments instead, a portfolio of dividend-paying stocks and interest-bearing bonds. This way, a consistent income can be generated from the portfolio, that when sufficient to cover monthly retirement expenses, means there’s no need to sell shares of the investments to realize the income. You simply live off the income and interest generated rather than eating into principle. This allows for consistent income into perpetuity as long as the dividends and interest are paid by a diversified portfolio of financially strong companies.

The strategy here is a not a new one, it’s been around forever. The fact is that most people only retire once, maybe twice, so the thought process here is a new one for most new retirees to consider. When transitioning from working for decades and earning a paycheck, to relying on savings and investments to provide that paycheck – even during crazy market cycles – the typical retiree will struggle a bit to make the necessary mindset shift from growth to income. Not only that, but the financial strategies must shift as well. This doesn’t happen on its own, it requires thoughtful planning and conversation.

So, beware the wealth mirage and be cautious to assume that what once was will always be. The risks of heading into retirement with the wrong investments – and growth-at-all-costs mindset – can be substantial, especially when a declining stock market threatens to wipe out years of savings. Shoot for the $500,000 or the $5,000,000, but just be sure that money is doing the job it needs to do in order to provide the retirement security you deserve.

All the best,

Adam Cufr, RICP®


Adam Cufr, RICP® (Retirement Income Certified Professional®) is a financial advisor and founding principal of Fourth Dimension Financial Group, LLC providing personal finance and retirement planning services. Adam is a Columnist for Retirement Advisor Magazine. He is also a sought-after media commentator and thought leader. Adam was named one of The 20 Most Creative People In Insurance in 2015 and is a columnist for Retirement Advisor Magazine and the author of Off the Record – Secrets to Building a Successful Retirement and a Lasting Legacy.

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